No one likes receiving bad news, which is why employers face a hard task in communicating to employees exactly how long they are likely to have to work to build sufficient income for their retirement.
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- Employers must be honest with staff about their savings goals.
- Employees need to understand how long they may need to work to afford their desired retirement lifestyle.
- Employers should remove all jargon from their communications.
Simon Chinnery, head of UK defined contribution (DC) practice at JP Morgan, says: “Communication is great, but if the message is remorselessly downbeat because the reality is that employees who haven’t put in much [money] are on track for bugger-all squared, it’s not a great message.”
But Andy Dickson, investment director, UK institutional business at Standard Life Investments, says tough love is needed to motivate staff to save for their retirement. “Employers should say: ‘if you continue to save at the level you are, then you’ll need to keep working until you’re 80, but if you double what you’re paying, you could go at 60’, then employees can make a judgement about how important it is at their current stage of life, based on their other priorities,” he says.
Although this may seem a depressing subject to broach, Dickson says employees can relate to these figures, whereas if an employer tells staff that their projection is that they are going to have a fund worth over £150,000 and from that they will get a pension of £6,000, it’s too abstract and doesn’t really mean anything to the employee.
Charles Pender, deputy chairman of Lloyd’s Superannuation Fund, agrees that employers’ communications should be focused on employees’ contribution levels. “Employers should be saying to employees: ‘if you increased your contributions, for every 1% on our current projections, you’d get X pounds more’,” he says. “But having said that, of course, all these projections are complete rubbish anyway: they’re based on very standard assumptions.”
Nevertheless, transport operator FirstGroup focuses its employee communications on retirement outcome projections, detailing what each pension scheme member must save to achieve their desired retirement income.
John Chilman, group reward and pensions director at FirstGroup, says: “I’m not trying to educate employees to make them chief investment officers and understand everything that happens underneath [the fund], but they need to understand the basics about what it’s designed to do and what it’s designed to return.
“We have a country modeller [an online modelling tool], so members can see what they need to save to live on in retirement, because the base minimums of auto-enrolment are definitely not enough, and then we can address the gap.”
Employers should also consider the vocabulary they use in communications.
Pete Strudwick, pensions and performance partner at insurer LV=, which has appointed a pensions communications adviser to assist with its pensions communications strategy , says: “Employers should be very careful about how they pick and choose what they say. They should definitely pull out all the jargon, because employees don’t get it. The idea of trying to educate staff so they can make their own investment choices is laudable, but I don’t think we’re going to be able to get there necessarily, certainly in some industries, so employers need to keep things as simple as possible.”
Strudwick has particular concerns about the use of words such as ‘default’. “The word default has negative connotations to most people because it’s about defaulting on your mortgage,” he says. “Is it the right word we should be using in this area?”
FirstGroup’s Chilman suggests employers should remove phrases in letters, such as ’the trustee has chosen a default fund for you’. “These are terrible words that makes it sound like employers have looked at [their employees’] personal circumstances and understood what they need,” he says.
Employers should avoid complicated communications for a default fund, and use language that the average employee will understand, he adds.
But Madeline Forrester, head of institutional sales at Axa Investment Managers, thinks employers face a challenge in balancing simple communications with providing enough information for members to engage with their pension fund .
“There is a real conflict [for employers] between the fear of legislation and wanting to inform employees,” she says. “This is far more of a conflict than people believe. If employers keep their communications too simple, they are in danger of employees saying ‘you didn’t tell me that’, but at the same time, if the employer had put 10,000 disclaimers at the bottom of every paragraph of their communications, employees wouldn’t have engaged at all.
“For me, that’s the real crux: how can employers do enough without exposing themselves, not to any risk, but to too much risk?”
Forrester says one of the biggest risks for employees is to have an unrealistic expectation about their own longevity. “They are thinking, ‘if I only live to X, I’ve only got that much back and I’m putting all this in’,” she says. “Employers almost need to tell staff, as well as how much they’re going to get, how long, on average, they’re going to get it for.”
JP Morgan’s Chinnery says employers should also communicate the retirement age to their workforce.
“The reality is that for the next 10 to 15 years, maybe longer, we’ll be in a deferred decade of retirement,” he says.
But Sarah Swift, a pensions partner at law firm Eversheds, says: “What employers are supposed to be communicating to members, at least at the outset, is what the objective of the default fund is. What is the intention behind it? By that, I mean what’s it going to be invested in, and what’s the purpose of it?”
Read the digital version of our supplement, The future of default funds 2014, in full.